Major controversy over refinery
The controversial $600 million crude oil refinery cum power plant complex proposed to be built at the Sapugaskande refinery site of the Ceylon Petroleum Corporation (CPC) has left industry watchers scratching their heads over the viability of the project.

However, its promoters describe it is a winner for the CPC, allowing it to make the best use of under-utilised assets.

President Chandrika Kumaratunga has blasted the proposal, accusing the government of violating tender procedure and seeking to privatise the CPC, and saying that it was an unsolicited one for which no competing or counter-proposals had been called.

But Power and Energy Minister Karu Jayasuriya told parliament last week that the government had no intention of privatising the CPC and that Cabinet approval had been sought merely to do a study that had been approved by the Board of Investment and the Prime Minister's office.

BOI officials declined comment saying that it came under the Public Enterprises Reform Commission. PERC officials were not available for comment.

Sources close to the project promoters said the proposed refinery's capacity would be 75,000 barrels per day (bpd) and the size of the power plant 300 megawatts.

The project aims to make use of under-utilised CPC assets such as the offshore mooring buoy to unload oil tankers, four crude oil storage tanks at Orugodawatte and land at Sapugaskande.

These assets are not used to their optimum capacity because of the small size of the CPC's refinery, which can refine only about 50,000 bpd.

The sources said the refinery would supply fuel to the power plant. "That's how it becomes viable," one source said. Excess refined products would be sold in the local market and given as bunkers to merchant shipping for which there is a big demand.

The CPC said in a statement that it would seek Cabinet approval to set up the refinery and that the government had already chosen Global Energy and Industrial Operation Inc. (GEIO) to manage the project. The CPC expects to earn around $10.7 million each year under the 20-year lease at the end of which the leased land and assets of the refinery would be transferred back to the CPC.

GEIO was negotiating with two foreign companies and several local blue-chip conglomerates to raise funds for the project, the statement said.

Petroleum industry experts said there were questions about the feasibility of the refinery project, given its relatively small size, the poor refining margins that were troubling the industry the world over, and the current refining over-capacity in the region.

They pointed out that the CPC's own plans to double the capacity of its refinery at Sapugaskande had been shelved because it was found to be uneconomical.

"Refining margins are low right now so the environment for a new refinery does not look very good," one expert said. But, he added, the project could be viable because it is associated with a power plant. The island is facing a severe power crisis and demand for power would only grow, especially if the peace talks succeed and result in an economic boom, he said.

One source said the Indian Oil Corporation, which recently clinched a deal with the CPC to lease the latter's tank farm in Trincomalee and acquire over 100 retail outlets, had not shown interest in the refining side of the business because of excess refining capacity in India, as well as in Singapore and the Arabian Gulf.

"The IOC was not interested," he said. "With so much of refining capacity in India it was not viable to start a refinery here unless there's a tie-up with the Ceylon Electricity Board for a long term supply contract."

Sources involved with the project said one of the key players was a Sri Lankan petroleum expert, a former director of the CPC and advisor to the World Bank, who had been promoting a huge refinery project and power plant in Hambantota with the backing of foreign oil majors in the early years of the People's Alliance government.
GEIO had been set up by this expert to run the project.

Kumaratunga in a statement last week described GEIO as an "entirely unknown entity".

She said the Power and Energy Minister had "presented a proposal to the Cabinet that essentially sought to privatise the CPC through a lease of its operating assets to an unknown entity styled Global Energy and Industrial Operations (GEIO) Inc.

"The proposal essentially envisaged a close co-operational and financial relationship between GEIO and the CPC on terms extremely favourable to GEIO.

The process and procedures followed with regard to the proposed lease of the CPC assets completely violate all accepted procedural norms of good governance and public accountability," she said.

Oil majors slam govt policy
By Akhry Ameer
Government policy in liberalising the retail petroleum market is vague and does not appear to be handled in the best interests of the country and the development of the industry, one of the oil majors said last week.Kishu Gomes, Managing Director, Caltex Lubricants Lanka Limited (CLLL), told Sunday Times FT that the way in which the policies are being implemented may not be attractive for any oil majors to invest here. At this point, Mobil, BP and Castrol are not interested in entering this sector, while Shell's intentions are still not clear, he said.

"However, we (Caltex) don't mind looking at it provided the prospects are good", said Gomes. Oil companies were unhappy with the way in which Ceylon Petroleum Corporation outlets had been earmarked for the Indian Oil Corporation. Since all CPC outlets are not profitable this leaves an unfair share for the prospective third player, he said.

The retail fuel market has thin margins and Sri Lanka's market is small, with a total demand of 65,000 barrels per day of which only 20,458 bpd come from retail channels, Gomes said. If the outlets are not distributed in a fair way it would not provide a big enough return for oil majors such as Caltex to invest in the local market, he said.

Multinationals would have to make heavy investments to upgrade existing outlets and maintain high standards and this would be profitable only if the conditions for entry are fair, he said. There were serious environmental concerns with some of the tanks in the outlets being as old as 78 years. Local representatives for Shell, ExxonMobil, BP and Castrol, Servo, Valvoline, and the LPG marketer Laugfs have developed a framework for the liberalisation of the local fuel market.

Its main recommendations were that the market should be opened to a maximum of three private investors, establishment of legislative and regulatory framework prior to liberalisation, "exclusive licensed wholesaler" status for successful investors, and a mandatory stake/investment in a supply terminal. It also said there should be no political interference and suggested a market price formula and for the CPC to phase out its domestic marketing of petroleum products within 3-5 years of liberalisation. It also recommended that the aviation business be divested as a separate business unit, as this would result in better value to the government.

Stock market bulls seen losing steam
Shares indices on the Colombo bourse rose sharply last week on goods news on the peace front with savvy market players making a killing by selling stocks whose prices were driven even higher by retail investors who followed in their wake, but brokers said a correction looked inevitable this week.

The Colombo Stock Exchange registered its highest turnover for the year last week and the third highest ever as the all share price index crossed the 800-mark after five years.

The ASPI closed at 838.9 on Thursday and the Milanka at 1,449.9.

"We feel the market is at its peak," said Dushyanth Wijayasingha, head of research at Asia Capital. "The possibilities of a correction and a cooling off period are much greater now."

Hasitha Premaratne, research analyst at HNB Stockbrokers, said: "The peace dividend may take time to materialise but people are already reacting to the news on the initial peace talks."

Analysts said solid progress in the peace process and a robust economic recovery would be required to sustain the market over the longer term.

Buying by high-profile investors like Dhammika Perera and cricket star Aravinda de Silva prompted retail investors to buy stocks they were said to be keen on, brokers said.

"Now the market has overheated," said one broker. "In the last few weeks it has just jumped up like hell on news about the peace talks. Retail investors have just blindly bought shares."

Dhammika Perera, one of the rich individual investors whose transactions are followed with much interest by retail investors,

unloaded a big chunk of Central Finance shares he had bought earlier at a profit during last week's rally.

"He made quite a buck on that," one broker said.

Central Finance shares fell to Rs. 88 at the close on Thursday after peaking at Rs. 100 on Wednesday when over a million shares changed hands.

Brokers expect the market to resume its gallop after the bout of profit taking with more upbeat news on the peace front and the prospects of big doses of foreign investment in the months ahead.

"A lot of people are waiting to buy when the market drops," said Premaratne of HNB Stockbrokers.

"What we need is for the market to get listed in the Morgan Stanley Capital International (MSCI)," said Shafi Wahid, a broker at DFCC Stockbrokers. "When that happens you'll get foreign investments in Sri Lanka." MSCI removed the Colombo bourse from its regional equities indices last year owing to its small size.

Asia Capital's Wijayasingha said the bull run was driven by optimism among investors about the success of peace talks between the government and the LTTE in Thailand.

The market was driven largely by retailers and selected high net-worth individuals, with limited foreign interest.

"The economy and the corporate sector are now on the recovery path. Valuations are still at the lower end of what we'd seen in the past," he said. "This was supported by positive sentiment."

But, he added, foreign buyers need to come in to sustain the upward trend.

"Foreigners probably want more clear indications on peace before investing here in a big way," Wijayasingha said.

HNB's Premaratne said the market could get another boost if the prime minister's meetings with top American businessmen result in US firms deciding to invest in the island.

SL Diaspora keen on investing here
While Prime Minister Ranil Wickremesinghe last week urged the international community in New York to invest in Sri Lanka "now" rather than "later", a cross section of the country's business community pleaded for support from the Sri Lankan Diaspora.

"We had an excellent dinner function with a varied section of the Sri Lankan Diaspora," said a delighted Neela Marikkar, spokesperson for business-peace group SriLankaFirst, on Friday.

Speaking to The Sunday Times FT by telephone just as the dinner ended, the Sri Lankan advertising executive - who helped start the business peace initiative along with Jagath Fernando, deputy chairman of John Keells and other top business professionals exactly one year ago - said members of the Diaspora are upbeat and looking forward to investing in their motherland.

"It's looking good for Sri Lanka. The prime minister's visit is an enormous success and has boosted investment prospects in our country," she said, adding that SriLankaFirst was planning "Invest in Sri Lanka" roadshows in Europe and Asia mainly targeting Sri Lankan businesspersons living abroad. A similar roadshow is also planned in Colombo.

Wickremesinghe's address to the UN General Assembly was very effective, according to UN sources in New York. "It was articulate, succinct, upbeat, statesmanlike, with even occasional humour thrown in," one UN source said adding that UN officials were also happy about the premier's gracious acknowledgement of UN support both in Sri Lanka and New York towards the peace initiative.

Officials accompanying Wickremesinghe said the premier was pleased with the results of the trip and his one-on-one meetings with the Chinese Foreign Minister, the Indian Prime Minister, billionaire investor George Soros, Frank Wisner, CEO of insurance giant, AIG, as well as with the UN Secretary General.

The UNDP gave high priority to the visit to the extent that Mark Malloch Brown, head of UNDP, postponed a long-planned speaking trip to Oxford to organise the UN part of Wickremesinghe's schedule and make sure nothing went wrong, in addition to meeting the premier, informed sources said.

Among the organisers of the SriLankaFirst dinner on September 19 in New York which coincided with the group's first 'hands-for-peace' initiative in Colombo, was Raj Rajaratnam, the Sri Lankan-born investor based in New York who has generated much attention with his forays into the Colombo bourse.

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